Post-Brexit Skills Shortages – Managing the Legal Risks

Mathias Cheung considers the potential skills shortage post Brexit, and the potential measures for minimising the risks in current and future projects. The key observations are that:

Statistics show that most businesses are not prepared for the loss of EU labour which is likely to result from Brexit.

Parties have to review currently agreed completion dates and contract sums and cooperate to make appropriate adjustments.

Foreseeable labour shortages should also be factored into the tender price and programme of prospective projects, and provisions will have to be made in future contracts.

The snap general election results have been a recipe for uncertainty for the Brexit negotiations and UK businesses, particularly the construction/infrastructure industry. The Architects’ Journal, for instance, reported serious concerns from the industry that the election results will ‘extend the current period of uncertainty’, to the chagrin of developers, contractors and construction professionals alike.

The Chief Executive of housebuilder Hill observed that ‘no business like uncertainty and housebuilders like it least of all… this is the exact wrong moment for a construction slow down’. There are real concerns across the country that major housebuilding and infrastructure projects (including HS2 and Crossrail 2, despite the exhortations of London Mayor Sadiq Khan) will be put on hold due to the political instability in Whitehall.

Among the many factors contributing to this potential slowdown, one of the most significant uncertainties is undoubtedly Brexit’s likely impact on the UK’s migrant workforce.

Impact of the election on skills shortages

It is no secret that there is already a considerable skills and labour shortage in the construction/infrastructure industry (see the Farmer Review published in October 2016). The industry therefore depends heavily on foreign workers who make up 17% of the UK’s construction workforce, with at least 8% of the workforce comprising EU nationals. The RICS has recently released a market survey showing that skills shortage is an impediment to growth for 53% of respondents. Wages and tender prices are also being driven up due to the significant imbalance in supply and demand.

In the pre-election issue of this Bulletin, I have highlighted this as a major risk area, due to the promised net migration cuts and the lack of assurances for the rights of EU nationals in the UK in the Conservative manifesto. Although there is a possibility that there will be a softer Brexit in the light of the election results, and the chancellor Philip Hammond has suggested to the BBC that he recognises the need for skilled migration to support the economy, the concerns are still very real. Industry professionals have been at pains to stress that ‘the retreat of a large, skilled European labour force from building sites across Britain will be catastrophic for costs and schedules’.

The fact that we now have a hung parliament could also mean that the issue of skills shortage is not given the attention it deserves. As Richard Laudy of Pinsent Masons said to the Global Construction Review, there is ‘a real fear that the Government will be distracted away from addressing questions such as the UK’s skill shortage as it seeks to shore up its own position’.

The adoption of a sensible post-Brexit immigration system in the final Brexit deal and the inclusion of construction workers/professionals in the Shortage Occupations List are among the proposed long-term solutions. In view of all the political uncertainties, however, what should the industry do in the interim to manage the legal and financial risks of current and prospective projects?

Managing the risks of skills shortages

A recent survey by Resolution Foundation shows that 30% of firms expect freedom of movement of EU nationals to continue so long as they have a job offer, and 17% even expect no changes to the rules. In addition, almost two-thirds of the firms want the current rules to remain largely unchanged. These expectations are said to be ‘unrealistic’, and most firms are ‘totally unprepared’ for a fall in migration. Speaking to the BBC, Lindsay Judge from the Foundation lamented that ‘there has not been any certainty of what the future migration regime might look like’.

These findings are alarming, and given the particular reliance in the construction and infrastructure industries on a constant EU workforce, firms must think long and hard about managing the potential risks. This applies to both existing and prospective projects.

(i) Existing projects

For existing projects, particularly those taken on before the EU Referendum, both employers and contractors should undertake a detailed review of the assumptions made at the time of entering into contract (particularly long-term projects like PFI contracts), and consider whether any adjustments or variations are necessary:

The key in this process is for parties to be open and transparent about potential disruptions and additional costs. It is likely to require a degree of good faith and cooperation in agreeing the way forward, whether by operating the contract in a way which is consistent with commercial common sense, or by renegotiating or varying contracts to make provision for new risks posed by Brexit and skills shortages.

In the event that disputes do arise between parties due to delay, disruption, additional costs or termination, a decent audit trail would be necessary to establish the causes of the delay, disruption and/or loss and expense. Good record-keeping by contractors has become more important than ever to ensure that a credible claim can be put together, and the Guidance on Core Principle 1 in the latest SCL Delay and Disruption Protocol is instructive.

(ii) Prospective projects

For prospective projects, parties have a chance to protect their positions and get it right before any of the contingencies actually materialise. As a basic rule of thumb, parties will have to take a practical and commercial approach during the tender stage, making sure that the project has been adequately priced to account for potential fluctuations in costs, and to factor potential labour shortages into the programme of works and contractual completion date. Cashflow and interim payment mechanisms should also be considered with care.

In addition, parties ought to think carefully about the potential contractual provisions to table during negotiations. While this would inevitably depend on the context of each project, examples include:

Negotiation of these contractual provisions will not necessarily be straightforward, especially if a standard form contract is being used. However, the risks of Brexit will affect employers, contractors and construction professionals alike, and all stakeholders stand to lose if they do not make adequate provisions for these contingencies. In the end, parties should take thorough legal advice before entering into contract, and more importantly, ensure that they have the necessary notices, records and evidence at their fingertips should a claim or dispute arise.

Mathias’ practice covers all areas of Chambers’ work, including construction, engineering and infrastructure, energy and utilities, information technology, and professional negligence. In addition to these specialist areas, he has gained experience in a wide range of commercial disputes, including cases on fraud, insurance, assignment, subrogation, and conflicts of law. Mathias is also the winner of the SCL Hudson Prize 2015 for his essay entitled ‘Shylock’s Construction Law: the Brave New Life of Liquidated Damages?’.

As a native of Hong Kong, Mathias is fluent in both Cantonese and Mandarin, and he is therefore able to take instructions for cases involving Chinese-speaking parties and Chinese documentation in Hong Kong, Mainland China, Singapore and other jurisdictions.